Wednesday, December 20, 2006

The Dirty Little Trade Secret

They released the trade numbers recently to show that we are behind again. We are trading at about a trillion dollar deficit level per year. That means that we give out a trillion dollars more for foreign goods and services than we take in by selling our goods and services to other countries.

A lot of people use this to determine how we are doing as a country, and to see if we are falling behind, or how healthy our economy is compared to others, etc.

The big secret here is that I don't think there is any reliable way to measure this at all. Consider the following:

1) A retailer here here might buy a refrigerator from a company in say, Germany. So it looks like we send $2,000 to Germany. But what if the German company is actually owned by a parent company in the US? Whose money is it then? Germany's or the US'?

2) The refrigerator, like most manufactured products, is itself a collection of other parts. There is a compressor, there are electrical components, there is the gas used, there is sheet metal and plastic extrusions, etc. etc. etc. Any of these parts may themselves be manufactured anywhere else in the world - including the US. So is it a German product? Or is it an American product because the parent company is American? Or is it the nationality of whatever the brand name is that gets glued to the door? Or is it the nationality of the conglomerate of manufacturers of all the parts down to the screws and nuts and washers?

3) What if the company in Germany is owned by a consortium of other companies, SOME of which are American and some of which are not?

4) What if the collection of companies that owns the German company are themselves partially owned by other American companies, and partially from other countries?

5) What if the companies that own the German company are themselves multi-national companies operating in many countries throughout the world?

6) I can't even tell what constitutes an "American company" anymore! Oracle, my old company, is a company that has a headquarters in California, BUT it has offices in 109 other countries, and of the 50,000 employees, over 35,000 of them live outside the US. The vast majority of the company is NOT in the US. The largest population of employees is actually in India now. And in each country they have bank accounts and assets and staff.
Is General Electric an "American" company? They are also all over the world. What about Toyota? Are they a Japanese car manufacturer? But they manufacture their cars like Camry's in a factory in the US. So when you buy a Toyota Camry, you buy it from a local dealer in the US, staffed by Americans. They bought the car from the distributor which is Gulf States Toyota, which is a company based in Houston. And they bought it from the factory which is ALSO in the US. SO which part of this is in Japan, exactly? Apparently, some corporate headquarters which gets a very small piece of the pie from the sale. They are mostly just selling a brand these days in that case. Even the design shops are in California much of the time.
And then even the companies we THINK are American, like General Motors and Ford, etc. have stockholders, and those stockholders could be anyone anywhere in the world.

So what makes it an "American" company exactly? They have owners everywhere, factories everywhere, staff everywhere, customers everywhere, bank accounts everywhere.... They have truly become global entities.

And when a number of these massive multi-national entities are trading back and forth, who can say how many of the dollars actually end up being 'owned' by a country or not?

Even if you try to ignore all the comings and goings of buys and sells and invoices, and just measure it by deposits to an American bank, how can you tell how "American" THAT is? If it's a large bank like JPMC Bank One, they have international branches and offices and processing centers in a host of other countries, just like any large company. And bank deposits are not actual tangible gold bullion or even cash in a vault somewhere. They are nothing more than electronic signals flying around the planet through the internet servers. The bank balances for accounts are just a series of numbers stored in a database. They are not cash or gold - they are the pale electronic after-image of financial transactions. They are a record of activity. They themselves are not money - but then they are as well. Do we have to figure out which series of computer hard-drives a given database resides on to tell if the "money" is in the US now? What if parts of the database resides in several systems around the world? If JPMC transfers it's database to a processing center in the UK, does the US trade deficit suddenly take a trillion dollar hit?

What if a company here in the US transfers 100 billion dollars from it's accounts here in a US bank to it's accounts in a UK bank? Does that affect the US Trade deficit? Does it count? After all, it is one company moving it's own asset around - no trade occurred. What if it even stays in the same bank and it's merely a move to a different account within the same bank? What if it's even still in the same database - but just somehow tagged as being through a UK branch? There was no trade, no movements of anything into or out of the country, but the records might make it look like there is - and it might affect income taxes and government revenues in 2 countries - even though nothing was bought or sold and no money changed hands!

What if amounts are stored here is a local bank but in Euro Dollar accounts? Does that mean it belongs to Europe? What if a bank account in France is in US dollars? Does that mean it belongs to the US tally of dollars? Do we count all the US dollar accounts in the world, and go with that? In that case, China has over one trillion US dollars right now - but it is on the other side of the planet. Or is it? Where is it physically? It probably should be counted as part of China's holdings, since they traded for it.

What if an American company, like GE, buys a compressor from a company in Brazil, and a motor from a company in Australia, and nuts and bolts and other parts from companies in China and Korea. Then they assemble a refrigerator in Germany, and sell it to a retail chain based in the UK, who sells it to a consumer in Italy? How much of that series of transactions is consider part of the US trade scenario? How about if even the profit from it is kept in a bank in Germany? Or Switzerland? THEN how much of it is considered American just because the company that orchestrated the dance is based in New York?

Nothing is physical, everything is everywhere. You can't even really count bank deposits by an American company to an American Bank because we cannot tell what the percentage of foreign ownership is for the company OR the bank, OR what percentage of which international transactions are represented in which deposits, or how much is there temporarily before moving on (in from one subsidiary in Spain, and out to another subsidiary in Indonesia...)

My point is that international business and the global economy is all so network-matrixed and integrated, that it is no longer possible to really tell national "ownership" for sure. Therefore, I believe the numbers they quote for the news are outdated measurements and in the light of this interdependent international business trading model, they have now been rendered obsolete, and even virtually meaningless.

We have to reinvent macro-economics for a post-internet, post-global outsourced business model.


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